CFPB Acts Against Payday Lender for Pressuring Consumers into Debt Cycle

Consumer Financial Protection Bureau, July 10, 2014

ACE to Pay $10 Million for Illegal Debt Collection Tactics 

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) took enforcement action against ACE Cash Express, one of the largest payday lenders in the United States, for pushing payday borrowers into a cycle of debt. The CFPB found that ACE used illegal debt collection tactics – including harassment and false threats of lawsuits or criminal prosecution – to pressure overdue borrowers into taking out additional loans they could not afford. ACE will provide $5 million in refunds and pay a $5 million penalty for these violations.

“ACE used false threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt,” said CFPB Director Richard Cordray. “This culture of coercion drained millions of dollars from cash-strapped consumers who had few options to fight back. The CFPB was created to stand up for consumers and today we are taking action to put an end to this illegal, predatory behavior.”

ACE is a financial services company headquartered in Irving, Texas. The company offers payday loans, check-cashing services, title loans, installment loans, and other consumer financial products and services. ACE offers the loans online and at many of its 1,500 retail storefronts. The storefronts are located in 36 states and the District of Columbia.

Payday loans are often described as a way for consumers to bridge a cash-flow shortage between paychecks or other income. They are usually expensive, small-dollar loans that must be repaid in full in a short period of time. A March 2014 CFPB study found that four out of five payday loans are rolled over or renewed within 14 days. It also found that the majority of all payday loans are made to borrowers who renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed.

The CFPB has authority to oversee the payday loan market and began supervising payday lenders in January 2012. Today’s action resulted from a CFPB examination, which the Bureau conducted in coordination with the Texas Office of Consumer Credit Commissioner, and subsequent enforcement investigation.

Illegal Debt Collection Threats and Harassment

The CFPB found that ACE used unfair, deceptive, and abusive practices to collect consumer debts, both when collecting its own debt and when using third-party debt collectors to collect its debts. The Bureau found that ACE collectors engaged in a number of aggressive and unlawful collections practices, including:

Threatening to sue or criminally prosecute: ACE debt collectors led consumers to believe that they would be sued or subject to criminal prosecution if they did not make payments. Collectors would use legal jargon in calls to consumers, such as telling a consumer he could be subject to “immediate proceedings based on the law” even though ACE did not actually sue consumers or attempt to bring criminal charges against them for non-payment of debts.

Threatening to charge extra fees and report consumers to credit reporting agencies: As a matter of corporate policy, ACE’s debt collectors, whether in-house or third-party, cannot charge collection fees and cannot report non-payment to credit reporting agencies. The collectors, however, told consumers all of these would occur or were possible.

Harassing consumers with collection calls: Some ACE in-house and third-party collectors abused and harassed consumers by making an excessive number of collection calls. In some of these cases, ACE repeatedly called the consumers’ employers and relatives and shared the details of the debt.

Pressured into Payday Cycle of Debt

The Bureau found that ACE used these illegal debt collection tactics to create a false sense of urgency to lure overdue borrowers into payday debt traps. ACE would encourage overdue borrowers to temporarily pay off their loans and then quickly re-borrow from ACE. Even after consumers explained to ACE that they could not afford to repay the loan, ACE would continue to pressure them into taking on more debt. Borrowers would pay new fees each time they took out another payday loan from ACE. The Bureau found that ACE’s creation of the false sense of urgency to get delinquent borrowers to take out more payday loans is abusive.

ACE’s 2011 training manual has a graphic illustrating this cycle of debt. According to the graphic, consumers begin by applying to ACE for a loan, which ACE approves. Next, if the consumer “exhausts the cash and does not have the ability to pay,” ACE “contacts the customer for payment or offers the option to refinance or extend the loan.” Then, when the consumer “does not make a payment and the account enters collections,” the cycle starts all over again—with the formerly overdue borrower applying for another payday loan.

The ACE cycle-of-debt training manual graphic is available at:http://files.consumerfinance.gov/f/201407_cfpb_graphic_ace-cash-express-…

Enforcement Action

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive, or abusive practices. The CFPB’s order requires ACE to take the following actions:

Pay $5 million in consumer refunds: ACE must provide $5 million in refunds to the overdue borrowers harmed by the illegal debt collection tactics during the period covered by the order. These borrowers will receive a refund of their payments to ACE, including fees and finance charges. ACE consumers will be contacted by a third-party settlement administrator about how to make a claim for a refund.

End illegal debt collection threats and harassment: The order requires ACE to ensure that it will not engage in unfair and deceptive collections practices. Those practices include, but are not limited to, disclosing debts to unauthorized third parties; directly contacting consumers who are represented by an attorney; and falsely threatening to sue consumers, report to credit bureaus, or add collection fees.

Stop pressuring consumers into cycles of debt: ACE’s collectors will no longer pressure delinquent borrowers to pay off a loan and then quickly take out a new loan from ACE. The Consent Order explicitly states that ACE may not use any abusive tactics.

Pay a $5 million fine: ACE will make a $5 million penalty payment to the CFPB’s Civil Penalty Fund.

The full text of the Bureau’s Consent Order is available at:http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-ex…

CFPB takes complaints about payday loans. To submit a complaint, consumers can:

–  Go online at consumerfinance.gov/complaint
–  Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372)
–  Fax the CFPB at 1-855-237-2392
–  Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

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Activists Denounce Payday Lending Bill Passed by Legislature, Sent to Governor

Advocates for Fair Lending Urge Governor to Veto Bill

St. Louis Post-Disptach, May 1, 2014 

JEFFERSON CITY • Regulations passed by the Missouri Legislature Thursday to restrict payday loans don’t go far enough for some community and faith-based groups.

Supporters of the legislation said the bill provides protections for consumers while still allowing payday lenders to operate and provide emergency loans for individuals who need them. Bill sponsor Sen. Mike Cunningham, R-Rogersville, said it was a step in the right direction.

“This bill does not allow any rollovers, and that was a major thing,” Cunningham said. “By stopping rollovers it stops this cycle of debt that people are in.”

But opponents of payday loans and the legislation sent to the governor Thursday said the only real reform for the industry would be a strict cap on annual interest rates and fees at 36 percent.

Under the current law, short-term loans for between 14 and 31 days and up to $500 can be renewed or “rolled over” up to six times and interest can continue to accumulate. Critics argue that these renewals trap low-income people into a cycle of debt and end up costing them far more than the original loan in fees and interest.

Four out of five payday loans are renewed or extended, according to a March 25 report by the Consumer Financial Protection Bureau.

The bill bans the practice in which a consumer would take out a new short-term loan instead of paying off the previous one. It also requires lenders to offer “extended payment plans” to a borrower.

No additional interest or fees could be charged during the extended 60- to 120-day payment period. Borrowers would only be able to get one of these deals in a year.

But Barbara Paulus, who leads the Economic Task Force for the Metropolitan Congregations United in St. Louis, said the legislation is sham reform and does nothing to help consumers. She said the rollover ban had done little in other states and consumers would still be able to take out back-to-back loans.

“Even though they’re not calling it a rollover, if you’re taking out nine loans a year it’s basically the same thing,” Paulus said.

Few consumers utilize extended repayment plans that are required by law, according to the Center for Responsible Lending. In Washington State, only 15 percent of eligible loans were repaid under the extended plan mandated there.

During debate on the House floor, opponents of the bill pointed out that there was nothing to stop a borrower from simply walking next door to a different lender and getting another loan – even if they were using an extended payment plan or could not pay off an existing loan. Rep. Gina Mitten, D-Richmond Heights, compared it to check kiting, where bad checks from one account are used to inflate another account.

“I end up in another extended payment plan, then another payday loan with another lender, until I have six different loans from six different payday loan companies – none of whom I can pay,” Mitten said. “That’s the fundamental issue.”

Unlike other forms of lending, the lender has no obligation to check or share with other lenders how much the borrower is already in debt, opponents said. Sen. John Lamping, R-Ladue, said the possibility of multiple loans with multiple vendors was a serious concern.

“At best this is neutral,” Lamping said. “This came from within the industry itself.”

Missouri currently caps interest and fees on a loan at 75 percent of the original principal, and payday loans can last for between 14 and 31 days. That would allow a lender to charge $75 on a $100 loan over 14 days – an interest rate over 1,950 percent. The average interest rate of payday loans in Missouri was 454 percent from 2011 to 2012, according to a report by the state’s finance division.

The bill lowers that cap to $35 in interest and fees per $100 in principal. The version initially passed by the Senate removed the cap entirely, which alarmed consumer advocates.

The 35 percent cap on the period of the loan means over the course of the shortest allowable payday loan of 14 days that would be an annual rate of 912 percent. On the longest 31-day loan, it would be a 412 percent annual interest rate.

Even though the bill’s cap is lower than current law allows, Paulus said it’s not enough. She said the annual interest rate should be capped at 36 percent as is required by federal law for military borrowers.

Molly Fleming-Pierre, policy director of Kansas City-based Communities Creating Opportunity, said the bill was deceptive.

“I think it is egregious for the Legislature to try to pass off something that allows payday lenders to charge 900 percent interest as reform,” Fleming-Pierre said.

Advocates who worked hard to get a 36 percent annual rate cap for short-term loans onto the ballot in 2012 faced aggressive opposition from the payday loan industry. The measure failed to gather enough signatures.

With a 36 percent annual interest rate cap, the maximum companies would be allowed to charge on a 14-day $100 loan would be less than a penny a day. Some Republican lawmakers argue this is unrealistic and would effectively end the payday loan industry in the state.

The example commonly used by supporters of the bill is that of a single mother or working parent who needs a short-term cash infusion for an emergency purchase. But a 2013 Pew Research Report showed that 58 percent of those using payday loans were borrowing to cover basic living expenses.

According to the report paying back the loan usually means doing what the consumer would’ve done if no short-term loan were available, with 41 percent of borrowers selling assets, relying on friends or relatives or taking out a different type of loan.

Mark Rhoads, an industry lobbyist, said during a House hearing that payday lenders were supportive of the changes in the bill – including the 35 percent cap over the course of the short-term loan.

“There are provisions in this bill that are going to be financially damaging to payday companies. We think it’s a fair and balanced approach,” Rhoads said. “We need to rein it in and bring it back to a more prohibitive, more strict regulatory scheme.”

Opponents said the support from the industry just proves it’s not real reform.

“In my experience, if the industry is for it it’s not something that’s going to serve consumers well,” Fleming-Pierre said.

The bill passed the House 112-39 and the Senate 26-4. It now goes to the governor’s desk for his signature or veto.

The bill is SB 694.

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